Northeast Gas Association

Northeast Gas Association Natural Gas and the Future Marc Goldsmith & Associates LLC 289 School Street Belmont, MA 02478 June 4, 2008

1 2 3 4 5 Industry Trends Rising natural gas prices Supply creating uncertainties Gas infrastructure and generation facilities Carbon legislation (RGGI and National) Risk management increasingly important Competition from new generation technologies Globalization Aging workforce Declining investment in R&D 6 7 8 9

1. Rising Natural Gas Prices Fuel Availability Regulatory Process Legislative Process There are multiple pressures on fuels delivery for customers. Virtually all of these factors are currently forcing prices higher. Forecasts CUSTOMERS PURCHASING FUELS Workforce Issues Transpor- tation Energy Needs & Require- ments Security & Reliability Financial Expect- ations Environ- mental Rqmts

1. Rising Natural Gas Prices EIA, which some believe historically under-estimates natural gas prices, is projecting a moderate upward trend over the next 6 months.

1. Rising Natural Gas Prices Natural Gas Price Projections

1. Rising Natural Gas Prices Situation Summary • Natural gas markets are very competitive, with prices determined by spot and futures markets reflecting current and expected supply and demand conditions globally. • Gas price will probably continue to rise, with pressure from problems such as market shortages, inadequate resource diversity, and worldwide events. As one analyst put it, gas has a “tendency to periodically rocket vertically in parabolic spikes.” • The recent high prices have prompted some policymakers to question whether natural gas should play a dominant role in generation. • Natural gas, oil, and coal prices will all continue to rise for different reasons.

1. Rising Natural Gas Prices • North American liquid and gaseous fuels production is declining and imports are increasing. • Forecasts are always uncertain and many political events can drive fuel prices faster than technical change. • The Chinese economy is growing at 9% and will increase its share of total world fuels consumption, including LNG. Situation Summary World demand for fuels is growing, particularly for low carbon fuels such as natural gas and especially LNG.

2. Supply Creating Uncertainties Question Will there be an adequate supply of gas? • Long cherished assumptions regarding an inexhaustible supply of natural gas that can reach markets needs to be re-examined. • According to EIA: • Total U.S. marketed natural gas production is expected to increase by 4.6% in 2008 then decline by 1.1 percent in 2009. • Through the first 4 months of 2008 LNG imports totaled 115 Bcf, considerably lower than the 283 Bcf at this time last year. • Current (4/25/00) working natural gas in storage is 1,371, which is 255 Bcf below the level during the corresponding week last year. • Total natural gas consumption is expected to increase by 1.4 percent in 2008 and by 0.5 percent in 2009. Source: EIA May 6, 2008 Short Term Outlook, http://www.eia.doe.gov/emeu/steo/pub/may08.pdf

2. Supply Creating Uncertainties

2. Supply Creating Uncertainties Situation Summary • If we want to ensure adequacy of supply, it will be necessary to increase natural gas drilling and production both domestically and worldwide. • New LNG terminals will be required in the U.S. to receive the LNG from overseas liquefaction facilities. This LNG will be marketed to a global market. • Cash flow from the sale of gas is an important determinant of drilling investments. With skyrocketing prices gas and oil investors are motivated to initiate more projects. • Previous downturns in the gas industry have triggered downsizing and cutbacks in spending for exploration and development of new gas sources. How do we stabilize supply, assure suppliers of a future, and maintain a competitive pricing structure?

3. Gas Infrastructure & Generation Facilities How will constraints on gas pipelines and other infrastructure impact the gas industry? Question • There have been several important infrastructure improvements in New England in recent years as the system becomes more vast and varied. Examples in 2008 are the Millennium Pipeline project (NY) and Maritimes (ME), Brunswick) phase 4. • However, rapid gas demand and economic growth has in places outstripped the rate of local infrastructure expansion and reinforcement. • Natural gas will increasingly need to be imported in the form of LNG, which is imported in ocean tankers. This requires facilities to receive the tankers, transfer the product, and then vaporize it so that it can be transported by newly constructed pipelines to the load or trunk-lines. • The siting of such facilities is controversial. States such as New York are placing limits on eminent domain used to take land for siting new infrastructure for not only LNG but pipelines and other facilities. How will you find the investment for new pipelines and how will that investment fare against investment in distribution and other facilities?

3. Gas Infrastructure & Generation Facilities Northeast Pipleine Projects in Progress Source: Northeast Gas Association, http://northeastgas.org/pdf/2007_statguide.pdf

3. Gas Infrastructure & Generation Facilities Existing and Proposed Underground Terminals Source: Northeast Gas Association, http://northeastgas.org/pdf/2007_statguide.pdf

3. Gas Infrastructure & Generation Facilities Planned LNG Storage Projects Source: Northeast Gas Association, http://northeastgas.org/pdf/2007_statguide.pdf

International National NIMTOO Local State NOPE NIMBY NIMTOO LULU BANANA 3. Gas Infrastructure & Generation Facilities • Can we find common ground on energy decision-making? • How do we educate consumers about the impacts of personal use and the long-term ramifications of a lack of supply?

3. Gas Infrastructure & Generation Facilities Situation Summary • Growth in demand for natural gas is increasing faster than infrastructure to serve this demand. • Opposition to new energy facilities is continuing. • Just say “No” is continuing for facilities ranging from wind power plants to LNG to coal. • Energy loads are growing in almost all sectors of the economy and across fuels. • Can a FERC eminent domain authority work for interstate pipelines in a timeframe that will maintain a reliable supply? • Permits are taking longer, are more costly, and the process, more acrimonious. • More and unnecessary resources are being put into the front end of the development process, raising the costs for everyone.

4. Carbon Legislation Question When will carbon legislation become an issue and how will gas markets be impacted? Carbon will soon be regulated in the New England states through: • Regional Greenhouse Gas Initiative (RGGI) (2009) is now going forward and CO2 will need to be maintained at current levels. • National carbon legislation is expected (date?) in the next few years. The prime mover is the Boxer, Warner, Lieberman Bill in the Senate which is a cap and trade.

4. Carbon Legislation The Regional Greenhouse Gas Initiative (RGGI) RGGI is a cooperative effort by a group of Northeast and Mid-Atlantic states that originated in New York with Governor Pataki to act locally to reduce greenhouse gases. Who This is a market based program to reduce emissions from regulated power plants, touted as the first of its kind in the nation. This regional cap-and-trade program regulates CO2 emissions from fossil fuel-fired units with over 25 MW. In addition to directly reducing emissions, plants can achieve compliance by purchasing offset credits from other non-power plant projects that reduce greenhouse gases. What In 2003 Governor Pataki sent letters to the 11 governors, and within three months eight governors said they were onboard. In 2005, seven states formalized their intention to implement RGGI. In 2007, a model rule was established for participating states. When Participants: Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York, Vermont, Massachusetts, and Maryland Observers: District of Columbia , Pennsylvania, Rhode Island, the Eastern Canadian Provinces, and New Brunswick Where Its goal is to address global warming through a reduction in CO2 from power plants. Enthusiasts believe it creates a model for a national program. Why

4. Carbon Legislation The Regional Greenhouse Gas Initiative: Goal of RGGI “Develop a multi-state cap-and-trade program covering greenhouse gas emissions. The program will initially be aimed at reducing carbon- dioxide emissions from power plants in participating states, while maintaining energy affordability and reliability and accommodating, to the extent feasible, the diversity in policies and programs in individual states. After the cap-and-trade program for power plants is implemented, the states may consider expanding the program to other kinds of sources.”

4. Carbon Legislation The Regional Greenhouse Gas Initiative: Milestones and Dates Program review Goal 10% overall reduction in CO2 emissions Program Launch 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Base Annual CO2 emissions budget remains unchanged Decrease of emissions by 2.5% annually

4. Carbon Legislation The Regional Greenhouse Gas Initiative: Multi-State Model RGGI is a regional plan but each state must, by the end of 2008, adopt its own regulations or laws for RGGI to come into effect. • A “model rule” was created by RGGI in 2006 and forms the basis for individual states to implement the program. • Each state goes through its own decision making process, with the legal requirements varying among states. • Each state gets a budget in tons of CO2 that its power plants can emit (the “allowance”), which is based on projected emissions in 2009. • These emissions levels are capped from 2009 to 2014, then must fall by 2.5% per year through 2018 so that they are 10% below 2009 at this point. • Each state may allocate allowances, which are emissions permits, as it determines appropriate, except that all states agree that 25% of their allowances will be allocated for consumer benefit or strategic energy purposes.

4. Carbon Legislation National: Situation Summary • All three presidential candidates have endorsed the concept of national carbon legislation. • As far as emissions reductions from power plants is concerned, it appears that cap-and-trade system will be the vehicle for implementing carbon-mitigation measures rather than a carbon tax. • The resulting cap-and-trade system will probably have a combination of a modest carbon reduction goal and a safety valve to protect against power prices going too high and there being too much natural gas fuel switching. • The regulatory objective is to reduce carbon emissions by as much as 50% by mid-century without causing huge disturbances to power prices, gas prices, or elsewhere in the economy. How will you manage customer requirements for gas under environmental regulatory constraints?

4. Carbon Legislation National: Situation Summary The issue will be debated as industry and environmentalists vie for control. • Power producers, petroleum refiners, and industries like aluminum production that consume lots of energy stand to win or lose hundreds of billions of dollars collectively depending on how the rules are written. • Edison Electric Institute has been clear that they want most of the allowances in any future federal program to be distributed for free. • One argument in favor of free credits is that regulated utilities must pass through any gains from owning emissions allowances to their customers. Natural gas could be the big winner, if more electric load is shifted to natural gas fired power plants.

5. Risk Management Increasingly Important How can we avoid surprises through the use of rigorous risk management? Question • The Sarbanes-Oxley Act and the post-Enron era have created a significant amount of attention that is now paid to risk management. • This attention has not only been on the trading floor, but has extended to the enterprise. • Leading companies are using risk management to gain competitive advantage. • New exploration and development is a high risk and high reward business.

5. Risk Management Increasingly Important Situation Summary • Risk management across all parts of the enterprise will be important. • Many unresolved questions . . . • Will the sources of LNG be reliable enough to risk the investment? Will risk increase if there are no re-gasification facilities? • Are the safety risks mitigated through technology? • Are you using risk management techniques to evaluate . . . • Siting issues • Investment opportunities • Efficiency versus new construction trade-offs • Are you evaluating new supply based on cost/risk parameters?

The Quick “Sears” Test  • Promised and set availability date  • Established price and size  • Product performance warranty 6. Competition from Generation Technologies How effectively will new generation technologies compete with gas? Question • Most are either not yet available or will not be of large scale. • Challenges remain from advocates with hopeful assumptions about the readiness of new technologies. • Integrated gasified combined cycle (IGCC) plants are being developed, but do not come with the “Sears” guarantee. • Hydro, wind, and solar are often of insufficient scale and/or quantity to compete with gas.

   Solar PV 4+  Natural Gas 3 ? 6. Competition from Generation Technologies Power Sources Typical Years to Build Resource of Sufficient Scale Environ-mentally Friendly Low Cost Electricity Proven Reliable Fully Operable  Hydroelectric 3+    Wind 3 ?   IGCC 7 ? ?   Advanced Nuclear 6+ ?  Coal 3  Oil 3 ? These technologies will not immediately compete with gas for electric generation.

6. Competition from Generation Technologies Situation Summary • New generating technologies that compete with natural gas for electricity production are either of insufficient scale or are not fully commercialized. • Consequently, they will not immediately compete with gas for electric generation. Therefore, natural gas will be the electric generation fuel of choice for the foreseeable future in Northeast.

7. Globalization How will globalization impact natural gas? Will there be a new OPEC for liquefied natural gas? Question • LNG is largely available from the Middle East and Africa where there is still little natural gas use and supplies are large. • Russia’s leadership has brought the cartel issue into public view during their trip to the Middle East to sell his plans for a natural gas cartel. • Could collaboration among LNG suppliers mean an OLNGEC? • How will natural gas price volatility impact companies and the regulatory compact as North American reserves decline and other countries’ demand grows? • LNG just helped equalize the global natural gas price making the natural gas market global, not local. How do you manage WACOG in a volatile global market for Natural gas?

7. Globalization Natural gas prices vary throughout the world, but with some convergence between North America, Europe and Asia. World Natural Gas Prices ($ per MBtu) Source: American Chemistry Council, http://www.americanchemistry.com

7. Globalization LNG Existing and Proposed Supply Locations Source: National Petroleum Council LNG flow is still primarily to the growing Asian tigers

7. Globalization Situation Summary • LNG plays on global more than local markets, and supply certainty is far from certain. • World gas prices are trending up together with greater globalization.

8. Aging Workforce How will we educate and train the next generation of gas employees when gas engineering is not considered an attractive career? Question • The gas industry workforce is aging: repair workers, engineers, managers—people with essential skills. • This issue had been worsening and reached a critical state within the past two years. • A skilled workforce shortage is already here. Utility employment has declined steadily since the introduction of deregulation legislation. • It is unclear whether pension reform will accelerate problems or reduce the risks of a departing work force.

8. Aging Workforce • How will we attract and retain a new workforce of dedicated and skilled workers. • How will we create a succession plan and get employees skilled to the necessary levels to protect themselves and the public. • A second risk is in capturing the institutional memories of the retiring workforce prior to retirement. • How will the changing demographics leading to a longer productive work life change the dynamics of the workforce. How are you planning to capture that long institutional memory and knowledge which will be difficult to retain and costly to replace? Situation Summary

9. Declining Investment in R&D What can be done about too little investment in R&D? Question • Technology development in the natural gas sector has lagged. • There is room for improvement in multiple areas including management of flow, compression, storage, pipe, and system optimization. • The natural gas industry competes with other energy technologies for government R&D funding. • Yet R&D has compelling advantages. Funding is highly correlated with an improved environment, lower costs, better safety, and customer service. • R & D has proven to improve system operations.

9. Declining Investment in R&D Situation Summary • Opportunity for new technologies and techniques is great due to slow investment for many years. • The reality is that R&D will be focused on a small set of politically favorable technologies at considerable public expense, often not pertaining to natural gas. • Billions will likely be spent to fully understand and commercialize areas of keen interest, such as carbon capture and sequestration. How can you make a better case for natural gas R& D?

Additional Information Marc Goldsmith, President Marc Goldsmith & Associates, LLC 289 School Street Belmont, MA 02478 Tel. 617.484.4664 Tel: 617.416.7638 Marc@mgallc.net www.mgallc.net Marc Goldsmith & Associates LLC serves the power industry, applying over thirty years expertise to energy-related problems and opportunities. The firm consults, manages, and participates in projects addressing every area of utility construction, regulatory management, operations, and deregulation. Its founder and President, Marc Goldsmith, started and built several consulting and energy companies. He has created new organizations, redesigned old ones, and advised large companies on changing to meet new competitive, technological, and regulatory challenges. He also helps companies break new ground in thinking about technology, deregulation, and business models. Marc Goldsmith & Associates LLC has a proud history of advising senior executives in the infrastructure businesses on business models, deregulation, operations, strategy and regulatory policy.

Northeast Gas Association